In this revision presentation we outline the main choices of legal structure for a new business, including sole trader, partnership, limited liability company and social enterprise.

1. Choosing a Legal
Structure for a
New Business

2. The main issues about structure
• There are several choices of business
structure for a start-up
• Actually setting up a new business is a
simple, cheap and straight-forward task
• The trick is to choose a legal structure to
minimise the risk of investment which is
also appropriate for the business
• The most important issue is whether the
entrepreneur is personally liable for the
debts of the business

3. Importance of limited liability
• An important protection for
shareholders in a company
• Shareholders can only lose the value of
their investment
• However limited liability does not
protect against:
– Wrongful or fraudulent trading, or
– When personal guarantees have been given by
directors

4. Sole trader
• The most common type of business
structure
• A sole trader is just an individual owning
the business on his/her own
• Remember that a sole trader can also
employ people – but those employees
don’t share in the ownership of the
business
• The sole trader owns all the business
assets personally and is personally
responsible for the business debts. A sole
trader has unlimited liability

5. Sole trader + / -
Advantages Disadvantages
Quick & easy to set up – business Full personal liability – “unlimited
can always be transferred to a liability”
limited company once launched Harder to raise finance – sole
Simple to run – owner has traders often have limited funds of
complete control over decision- their own and security against
making which to raise loans
Minimal paperwork The business is the owner – the
Easy to close / shut down business suffers if the owner
becomes ill, loses interest etc
Can pay a higher tax rate than a
company

6. Partnership
• Where a business is started and owned by more than one
person
• The legal partnership agreement describes how the
partnership is run, covering areas such as:
– How profits are to be shared
– What the partners have to invest into the business
– How decisions are taken
– What happens if a partner wants to leave or dies
• The partners between them own all the business assets and
owe all business liabilities
• Partners, therefore, also have unlimited liability

7. Partnership + / -
Advantages Disadvantages
Quite simple – certainly the Full personal liability – “unlimited
simplest way for two or more liability”
people to run a business together A poor decision by one partner
Minimal paperwork once damages the interests of the other
Partnership Agreement set up partners
Business benefits from the Harder to raise finance than a
expertise and efforts of more than company
one owner Partners are bound to honour
Partners can provide specialist decisions of others
skills Complicated to sell or close
Greater potential to raise finance –
partners each provide the
investment

8. Limited company (1)
• Limited companies are separate legal entities to
the founders. A legal entity can own things itself
(assets), can sue and be sued
• Companies are owned by their shareholders and
run by directors. The shareholders appoint the
directors (often the same people) who run the
company in the interests of the shareholders
• Shareholders own a share of the company, but
they do not own the assets of the company and
they are not liable for the debts of the company

9. Limited company (2)
• The company owns the assets and pays the debts. If
the company becomes insolvent (i.e. it cannot pay its
debts), then the company is closed.
• Shareholders are not liable for any debts owed by the
company that cannot be settled. That is the
importance of limited liability
• By far the most common form is a private limited
company. Private means that the shares of the
company are not traded publicly on a stock exchange
• By contrast, a public limited company (“plc” after its
name) tends to have a larger value of share capital
invested and its shares may be traded publicly. It is
rare for a start-up to be a plc

10. Limited Company + / -
Advantages Disadvantages
Limited liability – protects the Greater admin costs
shareholders (the big advantage) Public disclosure of
Easier to raise finance – both company information
through the sale of shares and also Directors’ legal duties
easier to raise debt
Stable form of structure – business
continues to exist even when
shareholders change
Can pay less tax

11. Not-for-profit organisations
• Not-for-profit organisations are businesses that
trade in order to benefit the community. These
business have social aims as well as trying to
make money
• Examples of social aims are job creation and
training, providing community services and fair
trade with developing countries
• There are many different types of social
enterprise, including community development
trusts, housing associations, worker-owned co-
operatives and even sports clubs

12. Social enterprises
• Trade in goods or
services for a social
purpose
• The Triple Bottom Line:
– Financial (surplus)
– Social
– Environmental
• Surplus goes towards
one or more social aims

13. Follow tutor2u on Twitter
tutor2u tutor2u_econ

14. Become a fan of tutor2u on
Facebook!
tutor2u on Facebook

15. Keep up-to-date with business
stories, resources, quizzes and
worksheets for your business
course. Click the logo!